Building a Bigger Nonprofit Sector

“The way we think about charity is dead wrong” is the title of Dan Pallotta’s March TED Talk. It has been viewed more than 1.6 million times. Pallotta was the architect of the hugely successful AIDS Rides and the Breast Cancer Three-Day walks (they brought in $581 million over nine years) and the author most recently of Charity Case: How the Nonprofit Community Can Stand Up for Itself and Really Change the World (Jossey-Bass, 2012). He thinks that the nonprofit sector, or as he prefers to call it, the humanitarian sector, is too small.

As he asks in the TED Talk:

Why have our breast cancer charities not come close to finding a cure for breast cancer, or our homeless charities not come close to ending homelessness in any major city? Why has poverty remained stuck at 12 percent of the U.S. population for 40 years? And the answer is these social problems are massive in scale; our organizations are tiny up against them, and we have a belief system that keeps them tiny.

Pallotta summarizes this system of beliefs and practices in Charity Case: “[Y]ou can’t use money to attract talent, you can’t advertise, you can’t take risks, you can’t invest in long-term results, and you don’t have a stock market.”

As a result of these limitations, Pallotta laments that the nonprofit sector has remained at just 2 percent of US GDP since the 1970s. He notes that only 144 nonprofits since 1970 have crossed the $50 million mark in annual fundraising, while more than 46,000 companies have done the same in their earnings. Growth is discouraged in the nonprofit sector; non-profits lack the options for capital generation enjoyed by business. As a result, “All of the scale goes to Coca-Cola and Burger King,” he tells the TED audience.

How to scale up? More overhead.

Americans are generally uncomfortable with nonprofit overhead. We become suspicious when we hear of charities with large administrative budgets, or of nonprofit executives making large salaries.

Yet earning potential is a major factor for talented people when they choose their profession, and it informs how they behave within a profession. And overhead costs like advertising actually generate results. Pallotta calls on charities to buy advertising for their causes in the same way businesses do. Pallotta promoted his AIDS and breast cancer events with full page ads in major newspapers, as well as spots on TV and radio.

Pallotta says that there should be a “Got Milk?” campaign for charity itself that would promote the acceptability of nonprofit overhead. In Charity Case, Pallotta describes the concept for a TV ad featuring a little girl with a penny bank:

I have been saving all of my birthday money for two years to give to charity. I am giving it to the Hope Soup Kitchen. But I don’t want them to spend it on soup. I want them to spend it on fundraising professionals. Because I want Hope to grow. I want Hope to be able to serve soup to everyone who needs it, not just the few they can afford to serve it to. And the only way they can do that is to invest more money in raising money. So here are my pennies and my dimes. Please invest them—all of them—in fundraising.

It isn’t just fundraising that suffers under the present arrangement. Risk taking and experimentation are discouraged in the nonprofit sector. Incentives drive innovation in the for-profit world; if a civic entrepreneur is to be as innovative as a business entrepreneur, there should be a serious financial draw. After all, the goal is to actually “solve social problems,” as Pallotta writes in the preface to his book.

Pallotta challenges his TED audience to move up charitable giving from 2 percent of GDP to 3 percent. This would result in an additional $150 billion to educational, health, human services, environmental, religious, and cultural institutions every year. It’s ambitious, but this may be the kind of ambition needed for our time.

Hans Zeiger leads the Center for Civic Leadership program at Discovery Institute.